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Minnesota's Taxes Minnesota’s Taxes: Who Pays and How Much Overview of Minnesota’s State and Local Tax System • Minnesotans paid an average of 11.3% of their incomes in total state and local taxes in 2002, the most recent year for which comprehensive data is available.1 • The highest-income Minnesotans contribute a smaller share of their incomes in total state and local taxes than other Minnesotans. In other words, Minnesota’s tax system is slightly regressive. • Minnesotans pay a significantly smaller share of their incomes in total state and local taxes than in the past. Minnesota’s taxes in 2002 were 12.4% lower than in 1994, measured as a share of income. • How Minnesotans pay their taxes varies with income. Lower-income Minnesotans pay a larger share of their incomes in sales and property taxes. Higher-income people pay more of their income in income taxes. Minnesota’s Tax System is Slightly Regressive Taxes can be described as regressive or progressive. A tax is regressive if taxpayers with lower incomes pay a higher share of their income for that tax than those with higher incomes do. In contrast, if those with higher incomes pay a higher percentage of income for a tax, that tax is progressive. Minnesota’s state and local tax system is slightly regressive. Although Minnesota’s tax system is sometimes described as proportional, meaning all Minnesotans pay about the same percentage of their incomes in total taxes, that label no longer fits Minnesota’s tax system as well as it once did. Changes Over Time: Lower Taxes Overall, Fairness Begins to Erode Since 1996, two significant and related changes have occurred in Minnesota’s tax system. One is that the share of income paid in taxes — or effective tax rate — has been reduced for all income groups. The other is that tax fairness Graph 1: Minnesota Tax Levels Over Time, 1996 to 2007 18 is eroding. Both of 1996 17 these trends are 1998 16 2 2002 shown in Graph 1. 2007 Projected 15 14 Over the surplus 13 years of 1997 to 12 11 2001, Minnesota’s Effective Tax Rate taxes were cut 10 significantly by the 9 Legislature. One- 8 Lowest 20% 30% 40% 50% 60% 70% 80% 90% Next Next Top 1% time rebates 10% 5% 4% totaling $3.7 billion Household Income Group 1 Except where noted, all data in this fact sheet come from current or past editions of the Minnesota Department of Revenue’s Tax Incidence Study, www.taxes.state.mn.us/legal_policy/research_reports/content/incidence.shtml. 2 There are a number of data concerns regarding the 10% of Minnesotans with the lowest incomes, which results in the Tax Incidence Study overstating the level of taxation for this group. For this reason, the results from that income group are generally disregarded when making statements about the tax system as a whole, and we follow that practice in this analysis. The Minnesota Budget Project is an initiative of the Minnesota Council of Nonprofits. 2314 University Avenue West #20, St. Paul, MN 55114 • (651) 642-1904 www.mncn.org/bp/ Updated April 2006 were enacted in each legislative session between 1997 and 2001. Permanent tax cuts were made in each of the surplus years: property taxes were cut in the 1997, 1998, 1999, and 2001 legislative sessions, income taxes in 1999 and 2000, and motor vehicle registration taxes in 1999. Not surprisingly, there has been a corresponding steady decline in the percentage of income Minnesotans pay in total state and local taxes, from 12.9% in 1994 to 11.3% in 2002.3 The share of income going to taxes has dropped by 12.4%. The second change is that, although Minnesota’s state and local tax system is still not strongly progressive or regressive, when tax levels are graphed, it looks less like the “flat line” pattern associated with a proportional tax. Instead, a hill-shaped pattern is emerging in which Minnesota’s tax system is progressive from the lower to middle incomes, but regressive from the middle to upper incomes. Minnesota’s Taxes: Who Pays and How Much? In 2002, Minnesotans paid an average of 11.3% of their incomes in total state and local taxes. State taxes account for 75% of the total taxes paid by Minnesotans and local taxes make up 25%. As shown in Graph 2, most Minnesotans pay roughly the same percentage of their incomes in state and local taxes, with some variation. Low-income households and the highest income households pay less than the average, with all other income groups paying more.4 Graph 2 puts Graph 2: Minnesota Effective Tax Rates (2002) households of the Other taxes same income level State sales & excise taxes together, but the 18% Property taxes actual taxes paid by 16% Corporate Franchise Tax Individual Income Tax any particular 14% 12.0% household will 11.4% 11.9% 11.8% 11.7% 11.4% 11.9% e 12% 10.5% 11.0% depend on factors 10.1% such as family size, 10% 9.0% marital status, 8% whether one is a 6% homeowner or a renter, and Percentage of Incom 4% eligibility for 2% various tax 0% deductions and -2% credits. $8,354 $8,355 - $14,066 - $20,715 - $27,704 - $35,684 - $45,437 - $57,590 - $74,190 - $102,427 - $139,653 - Over and under $14,065 $20,714 $27,703 $35,683 $45,436 $57,589 $74,189 $102,426 $139,652 $323,340 $323,340 Household Income While most Minnesotans pay about the same share of income in total state and local taxes, the way in which a household pays their taxes varies with income. Lower-income Minnesotans pay a larger share of their incomes in sales and property taxes, while higher-income Minnesotans pay a larger share in income taxes. This difference is important to keep in mind when evaluating proposals 3 Over time, the Tax Incidence Study has been expanded to include more of the total state and local tax system. For example, the 2003 Tax Incidence Study included the estate tax, waste taxes, local sales taxes, taconite taxes, and local gross receipts taxes for the first time. This added 1.9% to total measured taxes, which means that average tax levels for previous years is understated, and the actual drop in taxes from 1994 to 2002 is larger than indicated here. 4 The Tax Incidence Study divides the population into ten groups containing an equal number of households, called deciles. For example, the first decile contains the 10% of Minnesotans with the lowest incomes. The income figures shown in Graph 2 correspond to the 1st through 9th deciles, and then the 10th decile is divided into the first 5%, next 4%, and top 1%. Minnesota’s Taxes: Who Pays and How Much?, page 2 to change a certain tax. The impact will not be evenly felt “across the board,” but will depend on how much that tax contributes to the taxpayer’s total tax bill. Another way of measuring tax distribution is Table 1: Share of Income and of Taxes by comparing how much each group pays in Paid (2002) relation to its share of total income. This Share of Share of information is shown in Table 1. Table 1 Income all all Taxes demonstrates that each income group in Income Paid Minnesota pays roughly in proportion to its $8,354 and under 1.0% 1.6% share of total income. $8,355 - $14,065 2.1% 1.9% $14,066 -$20,714 3.2% 2.8% Each Tax Varies in its Impact $20,715 - $27,703 4.5% 4.3% In Minnesota, the progressive income tax $27,704 - $35,683 5.8% 5.8% balances the regressivity of other taxes. $35,684 - $45,436 7.4% 7.8% Minnesota is unusual in the degree to which it $45,437 - $57,589 9.4% 10.0% relies on the income tax, but this helps make $57,590 - $74,189 12.0% 12.5% Minnesota’s state and local tax system less $74,190 - $102,426 15.8% 16.3% regressive than is seen in other states. $102,427 and over 38.8% 36.8% The degree to which a tax is regressive or progressive is measured by the Suits Index, which is a number between –1.0 and 1.0. A proportional tax has a Suits Index of 0. A progressive tax has a positive Suits Index and a regressive tax has a negative Suits Index. Minnesota’s total state and local tax system had a Suits Index of –0.018 in 2002, indicating that it is slightly regressive. As shown in Table 2, individual taxes have very different Suits Indexes, with Minnesota’s estate tax and individual income taxes being the most progressive and gambling taxes and cigarette and tobacco taxes being the most regressive. Table 2: 2002 Suits Index by Tax Policy Implications Estate Tax 0.281 Tax fairness is created and maintained Individual Income Tax 0.199 through ongoing attention to how the tax Total State and Local Taxes -0.018 system is structured. When evaluating tax Motor Vehicle Registration Tax -0.107 proposals, Minnesotans should bear in mind Residential Property Taxes after the main features of our tax system: -0.107 impact of Property Tax Refunds Minnesota’s tax system is slightly regressive, Mortgage and Deed Taxes -0.111 individual tax types vary in their impact, and Corporate Franchise Tax -0.116 the share of Minnesotans’ incomes going to General Sales and Use Taxes -0.143 state and local taxes is significantly lower than Motor Vehicle Sales Tax -0.145 in the past.
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